Dive Brief:

• For its third quarter, fitness company Peloton reported total revenue dropped 22% year over year to $748.9 million, according to a Thursday shareholder letter. Total gross margin missed the company’s expectations, hitting 36.1% while net loss narrowed from $757.1 million the year before to $275.9 million. Meanwhile, operating expenses declined year over year from $920 million to $536.2 million.
• Separately, Peloton announced it reached a settlement and patent license agreement with Dish Technologies. Peloton will pay Dish $75 million to settle a United States International Trade Commission complaint it brought against the fitness brand in April 2021. The deal will “significantly pressure” Peloton’s Q4 free cash flow, according to CEO Barry McCarthy.
• The fitness company — known for its at-home workout equipment and classes — will relaunch its brand in May to “better communicate the brand value proposition,” McCarthy said. In an effort to position the brand as more than a cycling company, the Peloton app will be reintroduced with a tiered membership structure for its fitness content.

Dive Insight:

Demonstrating a disconnect between the brand’s cycling-oriented marketing and user experience, McCarthy said in the shareholder letter that 57% of all workouts were not cycling-related in Q3 and 38% of all workouts involved no Peloton hardware.

“We're primarily known as a bike company, but the behaviors of our members extend well beyond that into many different categories of exercise and a large percentage of folks use no hardware at all,” McCarthy said on a call with analysts Thursday. “We haven't done a very good job of communicating that to prospective members and we're looking to improve upon that. I think the advertising can be more inclusive than it has been historically.”

In the letter, McCarthy said this quarter was even better than Q2, which he had said was the company’s “best quarterly performance” in a year. McCarthy called out Peloton’s year-over-year growth in Q3 with connected fitness subscribers, which increased by 5%.

However, the average net monthly connected fitness subscriber churn was flat from the previous quarter and only slightly elevated from the year before, and Peloton's ending app subscriptions were down 13% from 2022. Peloton expects ending connected fitness subscriptions to decline by 1% in the fourth quarter compared to Q3. 

“The fourth quarter is seasonally our toughest or rather our least efficient quarter for us to grow subscribers,” Chief Financial Officer Liz Coddington said on Thursday’s call.

With the gross margin performance and subscriber outlook, BMO Capital Markets analyst Simeon Siegel in emailed comments said “we still believe [Peloton] could be better served as a smaller, healthier company.”

In regards to the new tiered membership for its app that will launch later this month, Coddington declined to share specifics on the pricing and differences between tiers.

The company’s push into hospitality — such as its deal with Hilton announced in October — has been a “fruitful source of consumer demand” for Peloton, according to McCarthy. Peloton plans to lean further into hospitality going forward.

As for Peloton’s more recent wholesale endeavors, especially its partnership with Dick’s Sporting Goods, Coddington said Peloton is “learning how to be a good wholesale partner to a retail business that is more traditional brick and mortar.” As a traditionally direct-to-consumer, web-based brand, Coddington added that Peloton is still understanding how to best leverage this channel.